PLEASE SOLVE SECOND PART You need a new car and the dealer has offered you a pri

ID: 2820714 • Letter: P

Question

PLEASE SOLVE SECOND PART

You need a new car and the dealer has offered you a price of $20,000, with the following payment options: (a) pay cash and receive a $2,000 rebate, or (b) pay a $5,000 down payment and finance the rest with a 0% APR loan over 30 months. But having just quit your job and started an MBA program, you are in debt and you expect to be in debt for at least the next 2 ½ years. You plan to use credit cards to pay your expenses; luckily you have one with a low (fixed) rate of 12.09% APR. which payment option is best for you? Your monthly discount rate is 1.008 %. (Round to four decimal places.) For you, the present value of option (b) is s (Round to the nearest dollar.)

Explanation / Answer

Monthly rate

12.09/12

1.0075

present value of future payment

Using Present value function in MS excel =pv(rate,nper,pmt,fv,type) rate = 1.008% nper = 30 PMT = (20000-5000)/30 = -500 fv = 0 type = 0

PV(1.008%,30,-500,0,0)

$12,888.78

Amount of down payment

5000

total present value under option 2

12888.78+5000

$17,888.78

Option -1 present value = 20000-2000

18000

Option 2 is better